Reference no: EM132714242

A general review of the purchase offers suggests that fantasy football companies generally sell for an average of two times revenues and four times net earnings. The owners review the internal financial statements for 2020, which report revenues of $975,000 and earnings of $536,250. Danny quickly determines that FFN could be sold for $2,047,500 or just over $1 million for each owner. This is a considerable sum of money given that they have invested only five years with FFN.

However, Manny states that the internal financial statements are only draft at this stage because he has yet to consider the impact of the following events:

• FFN writes an annual fantasy football magazine. The magazine goes on sale in July, and is sold through the company's website and through various retailers. This year, FFN secured a large contract with Books, a large book and magazine retailer in Canada. The contract allows Books to return any unsold magazines at the end of October (history suggests that annual magazines no longer sell after October as they become outdated and lose their relevance). A total of 40,000 magazines were shipped to Books in July. Books will be required to pay FFN $3 per magazine if all 40,000 are sold, $3.50 per magazine if less than 40,000 but more than 20,000 magazines are sold, and $4 per magazine if less than 20,000 are sold. The magazines have a retail price of $6.99.

• The cost to develop the content and publish the magazine was incurred in the months of April to July. Accordingly, Manny recorded $120,000 in revenue when the magazines were shipped. Historically, FFN has sold 70% of its stock prior to August. Danny and Manny believe that the amount of foot traffic at Books should increase the percentage of magazines sold.

• FFN revised the layout, graphics, and content of the annual magazine this year. The redesign resulted in an additional $45,000 in expenses in the current year, relative to the past three years, whereby the magazine maintained the same format as in prior years. Magazines normally go through a redesign phase every three to four years in order to provide readers with a fresh and current magazine. Manny has capitalized the $45,000 as an intangible asset (magazine design). The finite life asset will be amortized over its useful life.

FFN earns the majority of its revenue from fees charged to use its website to host a fantasy football league. FFN charges users $20 per season (seasons run from September to January). This year FFN offered two new promotions:

Early Bird Registration: Users who register and pay for a season prior to August 31 would be eligible for a reduced $15 fee. The fee is nonrefundable and must be used for the upcoming fantasy football season. A total of 5,000 users took advantage of the early bird price for the upcoming season. Revenue was recorded as users registered.

Three-Year Membership Fee Reduction: Users can register and pay for the next three seasons for a total price of $30. The fee is nonrefundable and must be used for the upcoming three fantasy football seasons. A total of 7,000 users registered for the three-year membership fee. Revenue was recorded as users registered for the three-year seasons' package.

• In addition to redesigning the annual magazine, FFN also redesigned its website. The redesign resulted in some general changes, along with significant upgrades to the functionality of the website. The total cost of the website redesign was $95,000, of which $57,000 was a result of programming costs for the upgrades and advertising. Manny has capitalized all $95,000 in costs to the website intangible asset.
• Given the nature of the company's operations, the vast majority of all costs are fixed overhead costs related to staff support, server maintenance, hardware maintenance, and website design. Any variable costs are immaterial.

Instructions

Problem 1: With the above information revised revenue and net earnings amounts in accordance with ASPE